Yahoo, Icahn Fire Broadsides as Shareholders' Meeting Draws Near

By JR Raphael
Jul 14, 2008 12:18 PM PT

The punches are starting to fly fast as Yahoo and Carl Icahn duke it out over the company's future. Yahoo shot down a new offer by Microsoft over the weekend to buy the search portion of its business and leave the remaining pieces under Icahn's control. Now, Icahn and the current board of directors are in a heated war of words over who has the shareholders' best interests in mind.

Yahoo's shareholders are set to meet in just under three weeks -- on Aug. 1 -- when they'll decide whether or not to replace the current management with Icahn and his proposed team. Icahn insists a deal with Microsoft will be imminent if his slate takes over. Yahoo's board ultimately has to prove it can provide a higher value for shareholders in order to avoid being ousted.

The Rejection

Word of the latest Microsoft offer broke Saturday, when Yahoo announced its rejection in a strongly worded statement.

Yahoo was given less than 24 hours to accept the proposal, and Microsoft and Icahn were unwilling to negotiate the fundamental terms, the company said.

Its current advertising deal with Google has a higher value and lower risk than the new proposal offers, Yahoo maintained, and the Microsoft deal would preclude a potential sale of all of Yahoo for a full and fair price.

It would leave the company under a new board's control -- a board that would have virtually no working knowledge of its business and would destabilize the company, Yahoo asserted.

"This odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo's stockholders in mind," said current Yahoo Chairman Roy Bostock.

Yahoo claimed it offered to make a full sale to Microsoft for US$33 per share -- the same price as the original bid it rejected earlier this year -- but that Microsoft was no longer interested.

Microsoft has made it clear that it's unwilling to negotiate a full purchase while the current board is in control.

Countering Claims

Icahn wasted no time in countering Yahoo's claims. In a letter to shareholders issued Monday morning, Icahn said he has never before seen "a company distort, omit and twist events and facts in the manner that Yahoo has done."

Icahn claimed the proposal offered more than 24 hours for a decision -- if Yahoo were willing to postpone the August meeting. He also said the deal could have left room for some current Yahoo executives to stay on board.

"Yahoo neglected to mention we were willing to discuss keeping a number of the current board members and Jerry Yang as Chief Yahoo," his letter reads.

Icahn questioned why Yahoo was suddenly interested in the $33 per share purchase when it had initially rejected that amount. He insisted that the only way to ensure a profitable acquisition deal with Microsoft would be to have his leaders in place.

Icahn also filed a proxy statement on Monday, detailing his Yahoo board nominations.

Fighting as Strategy

The back-and-forth fighting that's become the norm in these discussions is not terribly uncommon. Instead, many see it as part of a carefully planned strategy.

"When you get to negotiations, these are all people with gigantic egos," Thomas Lys, chair of accounting at
Northwestern University's Kellogg School of Management, told the E-Commerce Times. "Some of these tactics are to scare people. For the sort of money that we're talking about here, politeness is not valued very highly."

The personal nature of the battle may, in fact, have a strong impact on the end result.

"You look at all the reasons deals die or what kills them, and the biggest quote we use is that time kills all deals," Scott Bushkie, president/owner of business broker Cornerstone Business Services, told the E-Commerce Times. "As this thing continues to drag on, one or both sides will get deal fatigue and finally walk away."

Shareholder Interest

In the end, of course, it'll be up to shareholders to decide who can better handle their investments. As things stand now, Yahoo may have a tough time persuading them of its value.

"Shareholders have to be upset with Yahoo," Lys pointed out. "Here, Yahoo has been trading in the $20s [per share]. Microsoft was [originally] offering in the $30s -- and 50 percent premium in this market is huge."

The shareholders and Icahn may have very similar interests in mind.

"[Icahn's] motivation is very clear. He took a stake in it, and he's just trying to maximize his stake," Lys explained.

"Shareholders are ... interested in their investment just like [he] is. I suspect there's going to be huge pressure on the board from shareholders when the shareholders meeting comes up," he added.

Time Running Out

Yahoo's board continues to insist it can cut a stronger deal than Microsoft's before the upcoming shareholders' meeting. Time, however, is running out.

"Shareholders would have to ask the question: 'Well, wait a second: You're promising us that the company is going to be worth more in the long run -- but we could have had [33 dollars a share] right now. So why wait?'" Lys commented.

"They can't claim that Microsoft doesn't have the money to buy them or that this is just a pipe dream. The 30-plus dollars [per share] that Microsoft offered is real ... so the board will have a really tough time justifying its decisions," he said.

The shareholders will likely have the final say come August -- and if the situation remains the same, their decision may come easy.

"Thirty-three [dollars a share] or 20 [dollars a share]? For somebody who's interested in maximizing their portfolio return, I don't think it's a very difficult question," Lys concluded.